Progressive tax reform to promote both greater distributional fairness and increased fiscal capacity to fund social programs and public services should be squarely on the agenda for the 2017 federal budget. Indeed, with faltering growth, the federal Liberals will be hard-pressed to meet their commitments to new investments,while still ensuring a promised decline in the federal debt to GDP ratio, if they do not significantly increase revenues.
It is worth noting that limiting tax expenditures would also help the provinces raise badly needed additional revenues since they generally tax on the same base as the federal government.
In their 2015 election platform, the federal Liberals rather boldly promised to “conduct a review of all tax expenditures to target loopholes that particularly benefit the top one percent.” They specifically promised changes to the highly beneficial tax treatment of stock options.
The 2016 federal budget much more tepidly announced a review of tax expenditures over the next year “with a view to eliminating poorly targeted and inefficient tax measures.” On June 17, the Department of Finance named a panel of seven economists to provide advice to the review of tax expenditures to make them “fair, efficient and fiscally responsible.”
Unfortunately, public hearings do not appear to be planned, and the terms of reference set by the House of Commons Finance Committee for pre-federal budget submissions do not include progressive tax reform.
If the government is, as it should be, serious about its promise to crack down on tax loopholes that particularly benefit the top one percent earning more than about $200,000 per year, they should closely consult a recent paper which was published in the Canadian Tax Journal in 2015, “Top-End Progressivity and Federal Tax Preferences in Canada.” The paper was authored by Brian Murphy of Statistics Canada, Michael Veall of McMaster University and former Assistant Chief Statistician Michael Wolfson. It is based upon income tax data and estimates of the value of tax expenditures in 2011.
The study confirms the well-known fact that preferential income tax treatment of capital income as opposed to income from wages and salaries strongly benefits the most affluent. Most middle-class and working Canadians have limited investments outside of tax sheltered vehicles like pension plans and RRSPs.
The case for taxing capital income on the same basis as employment income on the grounds that “a buck is a buck” dates back at least to the Carter Commission of the 1960s, and has been supported by at least some of the seven economists appointed to the Department of Finance Advisory Committee.
The Canadian Tax Journal study finds that the top one percent of individual taxpayers earn 11.7% of all income, but receive almost all of the benefit of the stock options deduction and 87.4% of the benefit of the capital gains deduction. In the case of both stock options and capital gains, only 50% of income is liable to tax.
The top one percent also receive almost one half (47.8%) of the benefit of special tax treatment of dividends. Even within the top one percent, benefits are heavily tilted to the very rich, the top 0.1 percent, or one taxpayer in every one thousand.
These tax loopholes are costly. Partial inclusion of capital gains in taxable income costs the federal government alone $3.6 billion per year; partial inclusion of stock options costs $725 million per year; and special tax treatment of dividends costs $3.7 billion per year.
Realistic reform of these three tax preferences would likely limit them rather than eliminate them entirely. For example, the stock options deduction might continue, with a capped value and some exemption for employees in start-up companies. One might contemplate an increase in the capital gains inclusion rate to, say, 75% where it stood before 2000, with some protection for inflation, or a cap on the total amount of capital gains accrued.
Nonetheless, it is clear that significant additional tax revenues could be gained by limiting federal tax loopholes on capital income, and that this could lower the proportion of after-tax income received by the most affluent Canadians and promote greater income equality.
Progressive tax reform should very much be on the agenda in the lead-up to the 2017 federal budget.
Andrew Jackson is Adjunct Research Professor in the Institute of Political Economy at Carleton University, and senior policy adviser to the Broadbent Institute
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